It completely depends on whether your game is primarily using the mouse or not. If you are already using the mouse for your in- game actions, I suggest just making everything workable by clicking it. If you are using the keyboard for your in-game actions, then you might want to use a highlight selection system with letter shortcuts.

All-in-all, you want to make controls transparent to the user as much as possible. If their hand is already on the mouse (or keyboard), don't force them to move it unless completely necessary. The easiest way to deal with a list is always a menu where you can see the highlighted selection.

Letter to select is just... very... DOS (and/or for people who like to micro-manage RTS's like Starcraft ).

1) don't use words for inventory items; images are language independent, contain more information and deliver it more quickly to the user .2) if the user's action involves 2 actors, then drag & drop is the perfect fit. It also transfers well to touchscreen devices too.

Generally clicking & dragging is easier for new users to get into. Keyboard shortcuts are faster but take more time to learn.

If you design your game to be newbie-friendly, use click & drag. If you aim for a hardcore audience, use keyboard shortcuts. But the best, in my opinion, is to use both. Then new players can use the easy to learn way, and hardcore players can use the keyboard.

I switched to click and drag and I deffinetly think its a better fit. Seems easier and it also is much cleaner code wise.

I would add images but I dont have the talent, nor the time to make them drawings. The game already has 70 items and I have barely even delved into that aspect. Also, text fits into the "style" of the game.

With keys You either hit the right key or You don't.Drag'n'drop however needs You to be accurate on start and on stop. Grab in a wrong location and You can get a wrong item or nothing. Stop at a wrong location and You can reset Your current progress (the item goes back) or You drop it into a wrong location or something else. Then there is the hardware failures,mouse not keeping the mouse button pressed (I have a mouse, that acts up, in which cases I have dragged and dropped my folders in an unpredictable ways, very annoying)

What I am saying is that You need to be weary of the troubles it might cause when things do not go as You planned, in which case hitting the key is more stable and predictable solution.

An alternative to the both methods mentioned is to mark and move: click on the item You need to move and click where you need it to be. Though it's a 2 action sequence, it's an alternative

“The First Rule of Program Optimization: Don't do it. The Second Rule of Program Optimization (for experts only!): Don't do it yet.” - Michael A. Jackson

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